Is It Really That Hard to Get a Mortgage?

The realtors say it, the home builders say it, the architects say it, I've said it: For better or worse, tight mortgage lending standards are one of the big roadblocks to housing's recovery.

Now one economist is saying that's not true.

In studying data from the Home Mortgage Disclosure Act, which covers more than 80 percent of all home lending in the United States, Zillow's chief economist Stan Humphries found some surprising results:

In 2000, 54 percent of applications for conventional, owner-occupied, home purchase mortgages on one- to four-family homes resulted in mortgage originations (the balance being denied, withdrawn, or approved but not accepted by the borrower). By 2006, standards were indeed looser and 61 percent of applications for conventional mortgages resulted in originations. So what happened after the bust? Would it surprise you to learn that in 2010 63 percent of conventional mortgage applications resulted in originations? That’s right, for conventional mortgages, the conversion rate between applications and originations was actually higher last year than in either 2000 or 2006.

Humphries also looked at down payments, which are harder to compare, given that government data doesn't include second liens, which were of course all the rage during the recent housing boom (some call them "piggy back loans"). So at the request of the Wall Street Journal, Zillow recently looked at combined loan-to-value rations, for the total mortgage amount across all loans used to purchase a home. They did this in nine markets from 1997-2010.

In these markets, the median CLTV ratio across markets was 78 percent in the fourth quarter of 2010 (implying a 22 percent down payment) compared to 96 percent in the fourth quarter of 2006. That’s right, a 4 percent down payment at the height of the housing boom! But looking back to 2000, you’ll find that down payments were around 20 percent then as well. Again, it’s the credit standards of the boom period that look unusual in the larger historical context, not standards today.

Humphries admits that today's credit scores are far higher than they were during the housing boom and perhaps even before it, even at the Federal Housing Administration (FHA). What Humphries doesn't discuss is consumer sentiment, and that, say the Realtors and the home builders is what skews his findings.

“Zillow is looking at the wrong data," argues the National Association of Realtors' chief economist Lawrence Yun. "It is not about rejection rate on formal mortgage applications. Many people are not given pre-approval and dissuaded about loan qualifications even before formally applying. Furthermore, many people do not even try applying after hearing from friends and colleagues."

Yun says today's credit scores are overly stringent, netting a default rate of barely 1 percent. Some might say that's a good thing, but he says it divides our society, giving loans to only the "upper crust," in a sense paying back for the faults of the past in an unfair way.

The home builders say it's turning potential buyers away before they even get to the show house. National Association of Home Builders' chief economist David Crowe cites a survey they did last spring, asking potential buyers why they're not moving. 73 percent responded that it's because they think it would be hard to get financing. In other words, they hadn't even tried.